SWFs Look To Asset Utilisation To Improve Yields

Shanny Basar

State Street Corporation and the International Forum of Sovereign Wealth Funds (IFSWF) released today a new research paper, Enhanced Asset Utilisation to Improve Portfolio Returns.

For the report, State Street surveyed and interviewed a number of the IFSWF’s member organisations, which represent over half of the world’s sovereign wealth funds (SWFs). The research assessed how these long-term investors with large holdings of high-quality assets are well-placed to leverage and benefit from asset utilisation practices, such as securities lending, enhanced cash utilisation and collateral transformation.

According to the research, one half of surveyed respondents indicated they are currently engaged in securities lending, and a further 10 percent expressed their interest in initiating a lending program at their institution. Additionally, only 20 percent currently use collateral transformation in their investment activities, but more than 50 percent deem it as being of high or moderate importance.

In the current market, incipient regulatory requirements such as MiFID II are driving a rapid shift towards a wider use of new technologies, transforming the landscape of trading venues. Whilst most respondents (80 percent) do not directly use electronic or algorithmic trading tools, half rated their use being of high importance. This finding suggests that SWFs will increasingly focus on optimal execution to reduce trading costs and improve portfolio efficiencies.

“Historically, sovereign wealth funds have held large allocations to passive index strategies within fixed income and equity markets. However, in the current low-rate environment this has driven appetite for the use of asset utilisation techniques to improve yields from these portfolio holdings,” said Chirag Patel, head of Innovation and Advisory Solutions for EMEA at State Street Global Exchange.

“There has also been an increasing transformation amongst trading venues through the rapid advances in both electronic and algorithmic trading, resulting in cost cutting and enhanced trading efficiency. SWFs continue to look for new opportunities to increase yields and improve efficiencies within their investment processes. The low interest rate environment over the last several years has accelerated the adoption of novel asset utilisation and execution techniques and we have seen that SWFs have been benefitting from this.”

Duncan Bonfield, CEO of IFSWF, said “Sovereign wealth funds continue to be interested in ways to maximise their risk-adjusted returns over the long term. Adopting new asset utilisation practices can make investment execution more efficient and help them to boost returns without a significant impact on a fund’s risk profile.”

In 2016, State Street was appointed by IFSWF as one of its official research partners.

Source: State Street

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